Spiritually Bankrupt

Here is what I was taught about corporate Chapter 7 cases and is why I rarely file them.  Typically I do state-law corporate dissolutions instead.  To be clear, this regards filing the business entity itself, not the business owner.  Usually the business owner has to file bankruptcy because he or she has personally guaranteed the debt.  At that point, though, he or she can typically walk away from the old business entity and even start a brand new one to do the same kind of business.

Thank you to Weldon Ponder, a great bankruptcy attorney here in Austin.  Stay tuned for the counterpoint article shortly (after I get permission from the authors):

I have always thought the vast majority of these Chapter 7 filings for small corporations were a waste of everyone’s time and money and can turn into more grief than they are worth for the principals involved.  A corporate debtor does not get a discharge, so what’s the point?  In most cases, every asset is encumbered to an under-secured creditor, and there’s nothing there for the Chapter 7 Trustee to administer.

There are exceptions, of course.  If there’s little or no secured debt, then filing the Chapter 7 petition at least submits whatever assets are there to distribution through a formal process, and there is perhaps less risk someone will claim the shareholders made off with everything or favored themselves or their friends by repaying some debt and not others.  But for every case I’ve seen like that, I’ve seen ten where the Chapter 7 Trustee found something in the corporate books that opened up the insiders to a preference claim or worse.

I’ve only done one or two of these corporate Chapter 7 cases in 30+ years of bankruptcy practice and nowadays, I have to be convinced there’s a valid reason to file one (a reason other than me making an easy fee).

I know why a lot of people file these:  In probably most cases, it has the practical effect of shutting everyone up.  But depending on what’s buried in those bank records, it doesn’t always work out that way.  Right, trustees?

I’d be interested in opposing points of view on this.  It is a subject I have thought about many times.  Usually, my inclination is to let the closely-held corporation “die on the vine” and try to help the individuals maneuver their way through the mess they’ve created without putting the corp into bankruptcy.  Let the creditors take judgments against the corporation to their hearts’ content!

–Weldon Ponder

B. Weldon Ponder, Jr.
Attorney at Law
Building 3, Suite 200
4601 Spicewood Springs Rd.
Austin, TX 78759
Office Phone (512) 342-8222
Office Fax (512) 342-8444